Sheng Songcheng: Lowering the reserve requirement ratio is better than lowering interest rates, and monetary policy should adopt a "small step" approach

Currently, the economy is at a critical period of transformation and upgrading. On one hand, the overall economic fundamentals are stable, with resilience continuously emerging and positive factors accumulating; on the other hand, issues such as boosting domestic demand, deep adjustments in the real estate market, and net interest margins of commercial banks still need to be addressed. The Central Economic Work Conference held in December 2025 proposed that in the new situation, economic work "must fully tap economic potential, must adhere to both policy support and reform innovation, must achieve both 'flexibility' and 'good management', must closely combine investment in physical assets and investment in people, and must respond to external challenges through diligent internal practice." Against this backdrop, the rhythm of macroeconomic regulation, tool selection, and departmental collaboration has become a topic of high market concern. In the process of transforming the monetary policy framework, how should the sequencing of reserve requirement ratio cuts and interest rate reductions be adapted to national conditions? In which key areas should the coordination of fiscal and monetary policies focus? What are the core levers for boosting consumption, stabilizing the real estate market, and optimizing the financial structure? With these questions in mind, the Shanghai Securities Journal interviewed Sheng Songcheng, a professor of economics and finance at China Europe International Business School and the director of the China Chief Economist Forum Research Institute. Effective Coordination of Fiscal and Monetary Policies Shanghai Securities Journal: You have recently stated multiple times that "a reserve requirement ratio cut is better than an interest rate cut," and you predict that the next two years will be in a "gradual reserve requirement ratio and interest rate reduction cycle." In the context of commercial banks' net interest margins being at historical lows, what is the logic behind this policy sequencing? How does it fundamentally differ from the interest rate-centric operational framework of central banks in Western countries, and what unique considerations does it reflect in China's macroeconomic governance? Sheng Songcheng: First, "a reserve requirement ratio cut is better than an interest rate cut" is a viewpoint I have long adhered to; this does not deny the necessity of interest rate cuts, but rather indicates that reserve requirement ratio cuts are more suited to the current national conditions. In China's macroeconomic regulation system, fiscal policy plays a leading role, while monetary policy is responsible for "cooperation." Reserve requirement ratio cuts are one of the main tools for China's monetary policy to cooperate with fiscal policy. By directly releasing available funds for commercial banks, it helps promote the issuance of government bonds, thereby better supporting a more proactive fiscal policy. Most government bonds in China are purchased by commercial banks, with about 68% of national bonds and about 75% of local government bonds held by commercial banks. Additionally, in the current low-interest-rate environment, the pressure on commercial banks' interest margins does not support significant interest rate cuts, a viewpoint that has gained high consensus in the market. Secondly, the "gradual reserve requirement ratio and interest rate reduction cycle" refers to the idea that in the face of high uncertainty, monetary policy should adopt a "small steps" approach. There is often a certain lag from the implementation of monetary policy to its transmission to the real economy and its effects. Fiscal policy can directly intervene in economic activities, while monetary policy often operates indirectly, and its effectiveness is largely influenced by market feedback. For example, during the 2008 global financial crisis, the Federal Reserve significantly released liquidity in hopes that commercial banks would expand credit, but commercial banks were reluctant to cooperate due to risk concerns, leading to an excess reserve ratio of 20% for U.S. commercial banks in 2014. This fully illustrates that without the cooperation of the financial system, the central bank's monetary policy objectives are difficult to achieve. Therefore, monetary policy should not preset rigid paths but should implement gradual and discretionary regulation Central banks in Western countries generally adopt a price-based monetary policy framework centered on interest rates, but this premise relies on a low reserve requirement system. Since the 1990s, Western countries have rarely used deposit reserve tools frequently. Taking the United States as an example, by the end of 1990, the statutory reserve requirement for institutional time deposits had dropped to 0%; after the outbreak of the COVID-19 pandemic in 2020, the statutory reserve requirement for demand deposits above 3% was also uniformly reduced to 0%. Currently, the average statutory deposit reserve requirement for financial institutions in China is about 6.3%. Compared to other major countries, China still has considerable room for further cuts in reserve requirements. Currently, each 0.5 percentage point reduction in reserve requirements can provide approximately 1 trillion yuan of long-term liquidity to the market. Transitioning monetary policy from a quantity-based to a price-based control is an important direction for improving China's modern monetary policy framework in the future. At present, to enable price-based tools to truly play their role, it is essential to ensure the total liquidity injection, "first loosen the quantity, then strengthen price guidance." Shanghai Securities Journal: You proposed that "fiscal policy should play a leading role, and monetary policy should coordinate well." A key point of coordination is how reserve requirement cuts can provide funding for commercial banks to allocate government bonds. In which specific areas should the coordination between fiscal policy and monetary policy be strengthened next? The central bank is gradually incorporating government bond trading into its policy toolbox; what are the paths and prerequisites for this? Sheng Songcheng: Recently, the central bank announced a reduction in the interest rates of structural monetary policy tools, which is actually a way of coordinating fiscal and monetary policies. The central bank provides low-cost funds to commercial banks through structural monetary policy tools, forming a "benefit transfer" from the central bank to commercial banks. By providing relending or funding incentives, it supports financial institutions to increase credit allocation to specific fields and industries, thereby promoting a reduction in corporate financing costs. In short, diversified monetary policy tools aim to enhance the accessibility of credit supply and the effectiveness of credit allocation. At the same time, fiscal policy fundamentally promotes an increase in credit demand through measures such as fiscal interest subsidies and industrial subsidies. This year, the policy intensity of fiscal interest subsidies and structural interest rate cuts has significantly increased, and both will play a positive role in nurturing small and medium-sized technology enterprises and service industry enterprises. In recent years, China's structural monetary policy tools have continued to innovate, playing an increasingly important role, especially as effective means to support weak links in the economy (such as small and micro enterprises, preventing and resolving real estate risks, etc.) and key areas (such as technological innovation, advanced manufacturing, green development, etc.), promoting high-quality economic development. Government bond trading has become a new means for the central bank to adjust liquidity, but the operations conducted for the first time in 2024 and the restart in 2025 differ in market conditions and path design. Under the influence of multiple factors, the overall yield in China's bond market tends to decline. In August 2024, the central bank conducted its first open market government bond trading operation, using "buy short and sell long" to both increase liquidity injection and maintain an upward slope of the yield curve. By the end of 2024, a significant supply-demand imbalance appeared in the government bond market, leading to a rapid decline in yields. To stabilize market fluctuations and bond prices and interest rate expectations, the central bank temporarily suspended government bond trading operations Since 2025, the intensity of fiscal policy has increased unprecedentedly, with a significant increase in government bond supply, driving up government bond yields. In addition, the continuous warming of the stock market has also impacted the allocation in the bond market. As market expectations stabilize, the central bank is ushering in a policy window to reconfigure the bond market. For example, long-term interest rates are usually less sensitive to interest rate cuts, and the motivation for market bond issuance may be insufficient, thereby limiting the vitality of the real economy. The United States experienced similar issues during the quantitative easing period. To reduce the long-term financing costs for enterprises and local governments and strengthen market expectation management, our central bank may moderately implement "buy long, sell short" operations to support the implementation of more proactive fiscal policies and support investment in the real economy. Investing in Human Empowerment for High-Quality Growth Shanghai Securities Journal: You have previously advocated for solving the real estate issue by "squeezing out bubbles" rather than "bursting bubbles." In light of the policy goal of "promoting the stabilization and recovery of the real estate market," what do you think is the most critical "stabilizing expectations" measure at present? In the long term, what reforms should be made in land supply, fiscal and tax structure, etc., in addition to ensuring the construction of affordable housing to build a new model for real estate development? Sheng Songcheng: Since 2024, a series of policy measures to stabilize the real estate market have been implemented, such as adjusting housing purchase restrictions, lowering housing provident fund loan interest rates, and increasing the credit scale for "white list" projects. Overall, the decline in major real estate indicators such as sales and funding availability has narrowed. For example, in terms of real estate sales, in 2025, the sales area of newly built commercial housing decreased by 8.7% year-on-year, a reduction of 4.2 percentage points compared to 2024; the sales amount of newly built commercial housing decreased by 12.6% year-on-year, a reduction of 4.5 percentage points compared to 2024. Currently, the key to "stabilizing expectations" lies in further unblocking the replacement chain and enhancing the liquidity of the real estate market, which will allow existing policies to play a greater role. Fundamentally, residents' employment and income expectations are the main factors constraining the release of demand-side policy effects. According to the latest quarterly survey data from the People's Bank of China, the income perception index for urban depositors in the fourth quarter of 2025 was 46.1%, a decrease of 0.4 percentage points month-on-month; the employment perception index was 29.2%, an increase of 3.4 percentage points month-on-month, but still, 52.8% of residents believe that "the situation is severe, and employment is difficult" or "uncertain." To further release policy effects, first, the overall economic operation needs to show a significant recovery to improve real estate market expectations driven by the macro environment; second, the supply side needs to match the construction of "good houses" to enhance the attractiveness to homebuyers through intergenerational improvements in housing quality. Additionally, increasing the construction of affordable housing is also beneficial for destocking, enhancing purchasing power, and stabilizing market expectations. In the long term, to build a new model for real estate development, deep institutional reforms should be made in land supply and fiscal and tax structure, shifting from the past "developing through land" approach to a new mechanism of factor linkage defined by "people determining housing, housing determining land, and housing determining money." Local governments can actively explore diverse and sustainable fiscal and tax models to reduce reliance on "land finance." Shanghai Securities Journal: In the context of accelerating the construction of a financial powerhouse, what is the significance of optimizing the financial structure and developing direct financing for activating economic potential? In addition, some viewpoints suggest that the focus of economic growth should shift from "investment in objects" to "investment in people." In your opinion, what is the core policy connotation and approach of "investment in people"? Sheng Songcheng: From the comparison of the financial industry composition between China and the United States, the asset proportion of our banking industry is about 90%, while that of the United States is 45%; the asset proportion of capital market-related institutions in China is 3%, while that of the United States is 19.4%; the asset proportion of the insurance industry in China is 7.3%, while that of the United States is 35.4%. This indicates that China's financial system is primarily based on indirect financing. In this system, banks serve as the key hub for the transmission of monetary policy and the allocation of financial resources, having a decisive impact on credit issuance. In the past stage of economic development driven mainly by investment, indirect financing provided stable, efficient, and large-scale funding for infrastructure, real estate, and manufacturing, playing a crucial role in the stable operation of the economy. As we enter the stage of economic transformation and upgrading, the marginal effect of traditional investment characterized by "massive construction" has significantly declined, necessitating urgent support and cultivation of new growth drivers. However, the inherent characteristics of technology innovation enterprises and service enterprises are light assets, small scale, and high uncertainty, which are not entirely consistent with the banking system that emphasizes controllable risks. Building a strong capital market and gradually shifting the financial system towards direct financing will better serve technological innovation and the development of new productive forces, alleviating the financing constraints of "high-risk, high-return" technology innovation enterprises, thereby promoting the sustainable development of new growth drivers in economic transformation. The connotation of "investment in people" is to direct more fiscal funds and social resources towards improving people's livelihoods and public services, vigorously developing services in education, healthcare, and elderly care, fully ensuring employment, and continuously enhancing human capital levels and residents' consumption capacity, thus providing endogenous momentum for high-quality economic development. From a theoretical perspective, "investment in people" is highly consistent with the logic of human capital accumulation emphasized by endogenous economic growth theory, which drives long-term high-quality development; and in the context of needing to enhance consumption vitality, it places greater emphasis on people's livelihood concerns. The 2024 Central Economic Work Conference proposed "vigorously boosting consumption and improving investment efficiency," and the 2025 government work report proposed "creating new economic growth points in ensuring and improving people's livelihoods," with "investment in people" being an extension and specific embodiment of these relevant statements. From the main approaches: First, formulate and implement plans to increase the income of urban and rural residents, with greater emphasis on boosting consumption through the redistribution mechanism. In 2023, the proportion of disposable income of residents in China was 61.2%, which is more than 20 percentage points lower than that of the United States (85.5%), and about 7 and 5 percentage points lower than Germany (68.4%) and Japan (65.7%), respectively. Meanwhile, the income proportion of the household sector after redistribution in China has long been lower than that of the initial distribution, indicating that the income distribution adjustment function still has shortcomings, and the extent to which low-income groups share in economic growth needs to be improved. Second, the structure of fiscal expenditure should shift more towards people's livelihoods, continuously increasing spending in areas such as education, healthcare, elderly care, and childcare. Data shows that social security expenditure in developed countries accounts for about 10% to 20% of GDP, remaining generally stable In comparison, government spending in the livelihood sector in our country is less than 10%, indicating room for improvement. Currently, relevant specific measures are being accelerated. For example, a childcare subsidy of 3,600 yuan is provided annually for children under three years old, benefiting approximately 24 million people; preschool children in their final year are exempt from childcare education fees, benefiting about 12 million people. More measures to support consumption will be introduced in the future. Activating the Internal Potential of Consumption Shanghai Securities Journal: Your research suggests that boosting consumption through "redistribution" is key to stimulating domestic demand. In terms of implementation, which type of measure is more urgent and effective at this stage: short-term fiscal transfer payments (such as consumption vouchers and subsidies for specific groups) or long-term tax reforms (such as individual income tax deductions) to increase residents' per capita disposable income? Additionally, you proposed developing service consumption in areas such as housekeeping, elderly care, and childcare. How should policies specifically guide the demand structure to tilt towards these areas? Sheng Songcheng: In the short term, fiscal transfer payments (such as consumption vouchers and subsidies for specific groups) are more urgent and effective at this stage. The main reasons are: First, for more than twenty years, the income share of the household sector after redistribution has consistently been lower than that of the initial distribution (redistribution mainly includes personal taxes, social security, and transfer payments; the income after redistribution is the actual disposable income, which directly affects consumption capacity). In the short term, targeted transfer payments can directly increase cash flow for residents, especially for low- and middle-income groups, quickly enhancing their consumption propensity and having an immediate effect on boosting consumption. Second, from the perspective of counter-cyclical regulation, the current economic environment requires policies to respond quickly and accurately. Tools such as consumption vouchers and subsidies for specific groups have strong timeliness and clear targets, which can quickly stimulate consumer demand, especially suitable for addressing short-term external shocks and pressures from insufficient domestic demand. Third, there is still significant room for improvement in spending in the livelihood sector. Short-term transfer payments can fill gaps in public services such as social security and healthcare, enhancing residents' confidence and expectations in consumption. At this stage, fiscal transfer payments should be prioritized to quickly stabilize the consumption market while steadily advancing tax reforms and other long-term mechanisms, forming a policy combination of "short-term effectiveness and long-term solutions." Additionally, it is recommended to lower the tax rate for low- and middle-income individuals, reducing the individual income tax rate by 5 percentage points for those with annual incomes between 100,000 and 350,000 yuan. To guide demand towards service consumption in housekeeping, elderly care, and childcare, measures can be taken from several aspects: First, expand effective demand through government purchases. By procuring services, the government can provide stable and large-scale demand support for the market, encouraging enterprises to increase relevant investments. For example, increase investment in the construction of inclusive institutions in the childcare sector and support the development of elderly care parks in the elderly care sector, directly driving service supply and employment. Second, implement targeted tax and fiscal incentives. Expand the scope of VAT retention refunds for enterprises engaged in elderly care, childcare, and housekeeping services; include residents' expenditures on related services in the special additional deductions for individual income tax to reduce household consumption costs. At the same time, use government investment funds to guide social capital into the livelihood sector. Third, link services such as elderly care and health with personal pension accounts, such as matching nursing or medical resources according to the deposit scale, which not only enhances the attractiveness of the accounts but also promotes the development of the service market Shanghai Securities Journal: In which areas do you think macro-control policies can further exert effort? Sheng Songcheng: I would like to discuss some targeted suggestions for promoting consumption: First, in the implementation of the "two new" policies, consideration could be given to optimizing the implementation of consumer goods subsidy policies to further unleash consumption demand. For example, in conjunction with the Spring Festival holiday, special government bond quotas specifically for supporting consumption could be issued in advance and in batches, continuing to support the "old for new" program for durable consumer goods, and distributing consumption vouchers for cultural tourism and dining, resonating with seasonal demand; adjusting the areas supported by consumption subsidies, focusing on emerging consumption fields such as smart driving cars and AI terminal products; and increasing the gradient differences in the thresholds for the "old for new" program. Secondly, efforts could be focused on increasing subsidies for service consumption in the silver economy and childcare sectors. Taking the silver economy as an example, the proportion of elderly consumption in China accounts for about 11% of total household consumption, which is lower than the 14% proportion of the elderly population. In stark contrast, in developed Western countries, the proportion of elderly consumption often exceeds the proportion of the elderly population. Therefore, there is still considerable room for boosting consumption through the silver economy. The "Blue Book on the Silver Economy: China Silver Economy Development Report (2024)" estimates that the current scale of China's silver economy is around 7 trillion yuan, accounting for about 6% of GDP. By 2035, the scale of the silver economy is expected to reach 30 trillion yuan, accounting for 10% of GDP. Based on this calculation, the annual growth rate of China's silver economy may exceed 10%. Increasing support for the childcare economy is expected to synergize with existing policies. For example, China currently provides an annual childcare subsidy of 3,600 yuan for infants under three years old and exempts preschool children from education fees, which has improved household cash flow to some extent. To promote the conversion of this incremental cash flow into actual consumption expenditure, it is recommended to simultaneously increase subsidies for childcare services and consumer goods. Furthermore, leveraging the attractiveness of international consumption center cities and the Hainan Free Trade Port to domestic and foreign consumers. Risk Warning and Disclaimer The market has risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. 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